Indonesia's central bank maintained its benchmark BI rate at 7.50 percent, as expected, saying its current tight policy stance should help steer inflation back towards the bank's target corridor and reduce the current account deficit to a more sustainable level.
"Looking ahead, Bank Indonesia will continue to monitor risks emanating from the global economy, especially that triggered by the normalization policy of the Fed as well as the risk of an economic slowdown in China," Bank Indonesia (BI) said.
BI, which raised its rate by 175 basis points in 2013 to curb inflation and defend its rupiah currency, said data showed "the global economic recovery is gaining momentum amid dogged uncertainty on global financial markets, " due to robust economic growth in advanced countries, specifically the US and Japan, and this is expected to continue this year.
Economic growth in the fourth quarter of 2013 of an annual 5.72 percent exceeded the BI's projections and growth for the whole of 2013 averaged 5.78 percent, down from 2012's 6.3 percent.
For 2014, BI expects growth in the lower end of a 5.8-6.2 percent range with exports improving further while domestic demand continues to remain moderate.
Stronger exports in the fourth quarter of last year - helped by a decline in the rupiah which boosted exporters' international competitiveness - also narrowed Indonesia's current account deficit to only 1.98 percent of Gross Domestic Product from 3.85 percent in the third quarter.
"Exports are gaining traction on the back of increased exports from the manufacturing sector in line with growing demand from the US and Japan," BI said.
Indonesia's balance of payments is expected to improve further in 2014 on the back of a smaller current account deficit - helped by slower imports and higher exports - and a growing surplus in the capital and financial accounts. The country's foreign exchange reserves rose to US$ 100.7 billion in January, up from $99.4 billion in December.
The improving economy has also taken the pressure of the rupiah, which only depreciated by 0.33 percent to the U.S. dollar in January, closing at 12.210, compared with a drop of 1.71 percent in December. The rupiah came under strong pressure last year, especially from the end of May until August, as capital flowed out of the country, with the currency down almost 21 percent from end-2012 to the end of 2013.
"Looking forward, Bank Indonesia will consistently maintain rupiah exchange rate stability in line with its fundamental value and supported by a variety of endeavors to deepen the foreign exchange market," BI said.
Indonesia's inflation rate has remained above the bank's target of 4.5 percent, plus/minus one percentage point, since July when it rose due to a reduction in fuel subsidies. In January the inflation rate eased slightly to 8.22 percent from December's 8.38 percent, with prices still high due to the impact on food prices from flooding, while core inflation rose slightly due to the impact of the rupiah depreciation on goods such as motor vehicles and electronics.
The central bank said it "will remain vigilant of inflationary pressures and risks looking ahead, including disruptions to the supply of food, electricity rate hikes and the impact of rupiah depreciation."